Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

3 Reasons Why You Should Be Scared Of Inflation

By MarketBeat.com (Thomas Hughes )Stock MarketsJun 15, 2021 05:35AM ET
www.investing.com/analysis/3-reasons-why-you-should-be-scared-of-inflation-200586159
3 Reasons Why You Should Be Scared Of Inflation
By MarketBeat.com (Thomas Hughes )   |  Jun 15, 2021 05:35AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This Is Why The FED Will Hike Rates This Year

If the COVID-19 pandemic was the defining Black Swan event of our generation, rising inflation is the white swan event that will dominate our lives for the foreseeable future.

White Swan events are events that are easily predictable—and easily avoided—but for some reason, no one seems to be doing anything about it and in this case, it is rising prices. The FOMC has been trying to assure us that hyperinflation is transitory, but we do not agree.

The evidence does not suggest that recent spikes in consumer prices are transitory and will lead the FOMC to raise interest rates this year. The real question for investors is whether or not to prepare for such an event; we think the answer is yes.

If you think about it, the FOMC has been begging the economy to begin raising prices for years and it finally started to listen.

1. Inflation Is Already Here And You Can't Get Away From It

The really scary thing about the inflation picture is that Inflation is already here and nobody's doing anything about it. Starting with the Fed's preferred measure of core consumer-level inflation—the PCE price deflator—inflation spiked above the FOMC's 2% target, in March and has only accelerated in the time since.

The PCE accelerated at the core level from 1.9% in March to 3.1% in April and we expect it to go higher in May and June. Not one single S&P 500 company has been talking about lowering prices; if anything, they're talking about the impact of higher input costs, higher wage costs, and higher commodity costs, and the need to raise their prices to offset these pressures.

PCE Price Index YoY
PCE Price Index YoY

The Consumer Price Index tells the same tale. The Consumer Price Index has come in hot and above expectation for the past 2 months and accelerated from April to May with YOY gains of 5.0%. That's more than double the Fed's target 2% rate and it's accelerating.

Now, if we were talking about GDP or earnings growth the hot numbers wouldn't be such a big deal. Last year GDP shrank by 30% and earnings shrank by a high double-digit for most companies making this year’s comps incredibly good.

That said, the economy and corporate earnings have only barely returned to pre-pandemic growth levels. Inflation did not contract last year. It slowed to about 0.5% and then it reaccelerated and it's still accelerating. If there was ever a time for the FED to act to tamp down inflation, we think this is it.

2. Core Inflation Data Doesn't Measure Actual Inflation

If inflation is the net result of rising prices on the consumer, our core consumer inflation data isn't measuring what it is supposed to. The two most impactful items on consumer spending are energy and food, and those are the first two things taken out of the equation. When they are included, the impact of the index often doesn't match reality.

We know from the signs out on the street—and the prices that we pay—that gas prices are nearly double what they were last year. That's a 100% increase in energy inflation that's not being measured correctly; and that cost is feeding into food prices.

The biggest cost for food producers is energy. When it cost more for them to buy gas, it's going to cost us more to buy food and this goes for oh so many other sectors of the economy. According to the CPI, the cost of shelter only increased 2.2% over the past year, but we know the price of lumber and construction materials and houses are up at least 20% YOY and that's a very generous estimate.

Home prices are up at least 20% based on the Case-Shiller report and lumber prices are up triple digits. In our view, true consumer inflation is already running at a double-digit pace.

3. The FED knows More Than It's Letting On

You’d have to be pretty naïve to believe that the FOMC doesn't know more than it's letting on. We believe this is evident in the abrupt shift IN stance that we've seen within the committee over the past six months.

At the beginning of the year, even as late as March, the FOMC was projecting at least two years of zero interest rate policy, no need for taper, and no need for interest rate hikes. Now, 6 months later, the group of them are babbling on about “talking about talking about the taper,” along with their buddy, Secretary of the Treasury Janet Yellen (cough cough the x-FOMC chief), who thinks a rate hike could be needed.

The questions for us about the June FOMC meeting aren’t about if they will change what they say in the statement, but what is it they change and how will it affect the market.

In our view, the market needs to be prepared to be put on a firm track towards tapering and rate hikes.

Original Post

3 Reasons Why You Should Be Scared Of Inflation
 

Related Articles

3 Reasons Why You Should Be Scared Of Inflation

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email